What is a Mortgage Term?

The mortgage term is the duration of time over which the mortgage terms, including interest rates, will hold have legal effect.

A borrower does not necessarily need to have paid off the entire mortgage at the end of their mortgage term. In some cases, it will be necessary to renew or negotiate the terms of a mortgage to extend it into a new term and continue making payments.

After the expiration of a mortgage term, borrowers will also have the opportunity to switch over to another lending institution (another bank or private lender) should they find a better interest rate elsewhere, and should their current lending institution refuse to match the rate.

Example: A first time buyer gets a mortgage from Bank A for $200,000 at an interest rate of 2.35% , for an amortization period of 25 years. The banker suggests a mortgage term of 5 years. At the end of 5 years the entire $200,000 will not be fully paid off- under normal circumstances the outstanding balance at the end of 5 years should be $166,095. When the 5 years are up, the buyer is offered a new term of 5 years with the same terms and interest rates. However, while shopping around at different banks, he is offered a rate of 2.14% for 5 years by bank B. He can then present this offer to Bank A, and ask them to match it. Should bank A refuse, bank B will purchase the mortgage from bank A and the buyer's remaining loan of $166,095 will be transferred over.

A longer mortgage term will usually come with lower interest rates, giving the borrower more financial stability. However, a longer term limits the borrower's ability to look for a better deal if national or local rates go down. There may also be a hefty penalty attached to breaking your mortgage term, should the borrower unexpectedly need to sell their home.

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